Significant Changes to the Federal Student Loan program
Effective July 1, 2012:
The Budget Control Act of 2011, passed on August 2, 2011, brings about some significant changes to the federal student loan program.
Here is a brief summary of provisions that go into effect July 1, 2012:
- Federal Subsidized Direct Loans for graduate students are eliminated. This means all federal student
loan money for graduates will be unsubsidized. In the 2012-13 award year the annual unsubsidized loan limit
for graduate students is $20,500. Currently, qualifying students could receive up to $8,500 of the $20,500 in
subsidized loans, which are interest free to the student while in a qualified period of deferment (this includes
being enrolled at least half-time).
- For all students, Direct Loan Repayment Incentives were eliminated. These incentives provided a means to
make loans affordable on the front end and while in repayment. On the front end, rebates had been provided
to reduce the origination fee, meaning the student receives more loan money to use for educational purposes
due to fewer upfront fees deducted prior to disbursement. In repayment, students could qualify for
reductions to their interest rate making the overall cost of the loan less expensive. The only repayment
incentive that may still be possible is an interest rate reduction for a borrower who agrees to automatically
debited electronic loan payments.
- Grace Period Interest Subsidy eliminated on subsidized loans during the
six month grace period.
- Loss of origination fee rebate: For the 2011-2012 year, there is a
rebate of 0.5% on the 1% origination fee on Stafford loans, and a 1.5%
rebate on the 4% origination fee for PLUS loans. Beginning July 1, 2012, the
full fee--1% for Staffords and 4% for PLUS loans--will be charged.
In summary, federal loan money is going to be more expensive for the borrower beginning next year. Before you
decide to "jump ship" from the federal loan program and go to private educational loans for funding, please keep in
mind the benefits that are still part of the federal student loan program that private lenders are not required to give
you. There are more things to consider when taking out a student loan than just the interest rate. For example,
federal loans offer the following:
- Congressionally mandated deferment and forbearance periods for qualifying borrowers.
- Multiple repayment plan options to help make repayment more affordable. In some cases the payment
could even be $0 for a period of time.
- Loan forgiveness for qualifying borrowers.
- Loan discharge due to death or permanent disability. This means if something happens to you along these lines
the debt is forgiven and no one is responsible for it.
- Fixed interest rate that will not increase if rates in the general economy increase in the future.
- Tax deductions for loan interest paid to qualifying borrowers.